Money and Cars

DEVALUING RPI WILL SAVE MONEY, BUT ALSO MEANS MILLIONS LOSE OUT ON INFLATION PROTECTION

Wednesday 9 January 2013

Saga calls on ONS to ensure a balanced assessment of inflation calculations – a bespoke pensioner inflation measure would be more helpful for uprating pensions
Need to consider flaws in CPI - not just RPI - to maintain inflation protection

DEVALUING RPI WILL SAVE MONEY, BUT ALSO MEANS MILLIONS LOSE OUT ON INFLATION PROTECTION

As the ONS prepares to announce tomorrow its recommendation for future calculation of the Retail Price Index (RPI), Dr Ros Altmann, Director-General of Saga comments:

“The purpose of inflation uprating is to protect people’s incomes against inflation. If you devalue the index which is used then the protection is taken away. Simply dumbing down RPI would mean many people lose out on their inflation protection. This affects millions of people with pensions linked to RPI as well as nearly 1 million with National Savings inflation linked bonds or other RPI linked investments.

“We hope that this move is not just a desire to reduce costs and it is actually about finding the appropriate inflation rate. A balanced assessment of the accuracy of both CPI and RPI, rather than focussing only on reducing RPI, would at least be more reassuring as to the motives for this change.

“The ONS assumes CPI is right and RPI is wrong but in fact CPI may under-record inflation as it does not cope with substitution or reflect price rises properly when the lowest price goods rise the most in price. Saga suggests a more thorough assessment of the accuracy of inflation calculation methodology as a whole is needed before changes are made which can damage the incomes of millions. This is what we’ve asked for in our response to the ONS consultation. After 30 years of retirement, someone who receives 0.6% lower inflation uprating will end up with a pension nearly 20% lower after 30 years of retirement. Therefore, over time, pensioners will be able to afford less and less and pensioner poverty will increase once again.

"Surely a bespoke pensioner inflation measure would be more appropriate if the desire is to ensure statistical accuracy for the uprating!"

Pensioners already suffering from higher inflation

“Pensioners incomes are already suffering a higher rate of inflation than the rest of the population on both the national RPI and CPI measures as older people are often on a fixed income or trying to live off their savings and finding that inflation is eroding their spending power. We must consider carefully any measures which could perpetuate this situation and push many pensioners’ finances into further strife.”